August 09, 2022

Inflation, the Invasion, and the Great Resignation

If M&A in 2021 seemed an irresistible force, then the geopolitical strife of 2022 might threaten to be an immovable object. There is war on the edge of Europe, following Russia’s invasion of Ukraine. Supply chain problems caused by the pandemic created global business disruption - which the war has only made worse. The Great Resignation (another consequence of COVID) has sent quit rates soaring and wages in hot pursuit. Finally, spiking inflation rates have put business valuations into a tailspin. On paper, it looks like a perfect storm.

It would be no surprise to see M&A activity stalling. But the reality is far more interesting.

Datasite’s new M&A Outlook surveyed 543 senior M&A professionals on their expectations for the second half of the year. What they’re seeing isn’t so much a slowdown, as a reshaping.

Inflation hits valuations

Despite the economic stresses, 68% of respondents in Datasite’s survey expect global deal volumes to increase over the coming 12 months, while 15% predict that they will at least hold steady. Inflation is making asset valuation modeling more difficult. The bulk of respondents (39%) are pricing a 5-7% uptick in inflation into their financial models. An additional 39% are pricing in inflation at 8% or higher.

Clearly, high inflation isn’t damming the deal flow – yet – but it does appear to be redirecting it. Although just 20% believe it will reduce M&A overall, 46% foresee a move towards harder assets such as real estate, and a greater ratio of equity to debt. Over a third (34%) expect more cash deals.

Respondents also foresee a shift towards particular types of deals. Most anticipated is an increase in transformational acquisitions and mergers, expected by 46%. Other predicted developments include more debt financing (37%), and more secondary buyouts (33%). Only a few (13%) expect more IPOs or SPACs, but encouragingly even fewer (12%) believe more liquidations will result.

War rewrites strategies

Dealmakers seem more than ready to absorb the shock of inflation. A far bigger concern is the war in Ukraine. Cited by 35% of respondents, it is seen as the greatest threat to deal progress this year – more than twice as problematic as either inflation or supply chain risks (both at 15%). Nearly half (44%) of respondents also say the war is affecting their working lives, harming their ability to concentrate or causing fears about job security.

Meanwhile, the war is impacting dealmaking strategies. More than half (52%) of M&A advisors are working on more alternative deal and financing structures, while 34% are preparing to shift resources towards distressed M&A and restructuring. As for those in private equity and corporate development, 45% are pausing larger M&A activities, and many are reviewing their geographic exposure to Russia and Ukraine (39%), and/or disengaging from stakeholders with conflicts of interest (37%). Similar numbers are reviewing their portfolios for potential divestitures and spin-offs (37%). 

Broadly, dealmakers identify three major effects from the war:

  1. Deals are taking longer to close (39%)
  2. Buyers are withdrawing or going cold (37%)
  3. Sellers are putting their processes on hold (36%)

That said, 24% see little or no impact, while 17% have observed a bounce-back after the initial pause.

Resignation drives innovation

What about the third force at work upon the M&A market – the Big Quit? Perhaps inevitably, with a reduced talent pool, 68% of respondents say their workload has increased. The consequences of this include more mistakes being made in due diligence (30%), and deals being delayed (34%).

Global labor shortages are also making it harder to retain employees after deals close, as employers compete to attract the best. This issue is identified by 39%, so it’s no surprise to see that the same number call for increased due diligence around cultural fit. Another remedy, favored by 38%, is more earn-outs and ring-fencing to ensure key players stay in place. Even more (40%) recommend that due diligence looks more closely at non-compete agreements, to minimize the risk of rivals siphoning off top talent.

The Catch-22 here is that staff shortages make due diligence more of a burden – even as staff retention demands more intensive due diligence. In response, many dealmakers are turning to technology to pick up the slack, with 47% seeing this as a big part of the solution. A prime example is the shift in the way dealmakers incorporate labor-saving tools to reduce deal times by weeks. In this way, dealmakers can overcome the bandwidth issues that are putting many deals on hold, while also delivering the enhanced due diligence needed to retain employees after a deal has gone through.

Riding the rapids

The pressures facing dealmaking, though not a roadblock, are certainly an obstacle course. The strong current of M&A inherited from 2021 has been diverted and reshaped by the threefold challenge of inflation, the war, and the Great Resignation. Datasite’s findings show a dealmaking community well aware of the pressures, and ready with tactics to address them. There is every reason to be confident in their upbeat predictions for the second half of 2022 – while heeding their warnings.

As the Tide Turns, What’s Next? H2 2022 Market Outlook

If 2021 was a high water mark for M&A, then 2022 is seeing the ebbing of the tide. In our latest report in association with PitchBook, Datasite assesses the new outlook for dealmakers.

Learn More

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